Holton v. Zaidel (In re Zaidel)

553 B.R. 655

In re: Casey John Zaidel and Mandee Maree Zaidel, Debtors.

Mary Holton, Plaintiff

v.Casey John Zaidel et al., Defendants.

Case No. 15–27551–beh

Adversary No. 15–2450

United States Bankruptcy Court, E.D. Wisconsin.

Signed July 14, 2016

Aaron M. Ninnemann, Gerbers Law, S.C., Green Bay, WI, for Plaintiff.

James E. Lewis, Lewis & Van Sickle, LLC, Lawrence G. Vesely, Green Bay, WI, for Defendants.

MEMORANDUM DECISION AND ORDER

Beth E. Hanan, United States Bankruptcy Judge

Plaintiff Mary Holton seeks a determination that a debt owed her by Casey and Mandee Zaidel for replacement of her septic system is nondischargeable under 11 U.S.C. § 523(a)(2). She alleges the Zaidels wrongfully and intentionally misrepresented the non-compliant status of the septic system when selling their home to Ms. Holton. The Zaidels dispute the existence of the debt and in any event contend that it may be discharged in their chapter 7 bankruptcy case.

For the reasons that follow, the court finds that the Zaidels did not know that they made a false representation and lacked an intent to deceive Ms. Holton and, therefore, holds that their alleged debt to Ms. Holton is dischargeable under 11 U.S.C. § 523(a)(2)(A).¹

I. Jurisdiction

The parties agree that the court has jurisdiction to decide this matter, based on the general order of reference entered by the United States District Court for this District and pursuant to the provisions of 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(1). This matter was tried to the court on March 18, 2016, and after post-trial review of four deposition transcripts, fourteen exhibits and written closing statements, the court took the matter under advisement. Attorney Aaron Ninneman appeared on behalf of Ms. Holton and Attorney Larry Vesely appeared on behalf of the Zaidels. The following constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

II. Procedural History

On April 25, 2014, buyer Mary Holton sued the debtor-sellers Casey and Mandee Zaidel in Oconto County Circuit Court, asserting claims for breach of contract/warranty, intentional deceit/misrepresentation, and strict responsibility misrepresentation. The state court action was set for trial on June 30, 2015. On June 26, 2015, the Zaidels filed a chapter 7 bankruptcy petition.

Ms. Holton subsequently filed this adversary proceeding, seeking a determination that the Zaidels owe her a non-dischargeable debt of $12,187.00 under 11 U.S.C. § 523(a)(2)(A), for replacement of her septic system. Ms. Holton alleges that the Zaidels deceived her into purchasing a home from them by concealing the fact that the home's septic system needed to be replaced. The Zaidels list an unsecured debt owed to Ms. Holton in that amount, but describe the debt as “disputed,” and assert that the alleged debt is dischargeable in any event. See Case No. 15–27551, CM–ECF, Doc. No. 1, at 17; Adversary Case No. 15–02450, CM–ECF, Doc. No. 37.

III. Factual Findings

The parties did not stipulate to any facts. The following constitutes the court's finding of facts based on the testimony of five live witnesses: Mandee and Casey Zaidel, Mary Holton, Julie Johnson and Kevin Brehmer. The court also considered deposition testimony of four additional witnesses—Tina Owens, Nicole Willems, Casey Filz and George Chambers—and fourteen exhibits.

A. Offer to Purchase Negotiations

In August 2012, the Zaidels listed their Pulaski, Wisconsin home (“the Property”) for sale through realtor Tina Owens. A Condition Report signed by the Zaidels at that time stated that the sellers were not aware of any defects in the septic system (Exhibit 2, item C.7). See CM–ECF, Doc. No. 32, at 28. In early 2013, the Zaidels received and accepted an offer to purchase the Property. That offer ultimately fell through during the first or second week of March, because, as Mrs. Zaidel testified, the potential buyers could not obtain financing. See also CM–ECF, Doc. No. 34, at 2.

Plaintiff Mary Holton toured the Property for the first time at the end of March 2013, and for a second time in early April 2013. On April 5, 2013, she submitted a purchase offer through her realtor, Nicole Willems (Exhibit 1). See CM–ECF, Doc. No. 32, at 11. The Addendum to the offer required the Zaidels to provide Ms. Holton, no later than 15 days prior to closing, “a current written report, including soil test data, if a soil test is required by county regulations ... which indicates that the [septic system] is not disapproved for current use and complies with current county requirements for continued operation.” Id., at 24.

The Addendum further noted at lines 100–103: “Buyer should check with the county, the municipal sewer/water district, and evaluate the well and private sanitary system ordinances and codes for additional requirements that may apply to the Property if material to Buyer's decision to purchase.” Id., at 25.

Line 159 of the purchase offer states: “Seller represents to Buyer that as of the date of acceptance Seller has no notice or knowledge of Conditions Affecting the Property or Transaction (lines 64–114) other than those identified in Seller's Real Estate Condition Report dated August 3, 2012, which was received by Buyer prior to Buyer signing this Offer and which is made a part of this Offer by reference....” Id., at 5.

After a series of counter-offers, on April 9, 2013, the Zaidels accepted Ms. Holton's offer, which incorporated the septic system compliance contingency of the original offer. Id., at 12–15.

B. The First Septic System Inspection

In the Spring of 2013, plumber Casey Filz and soil tester Jeffrey Zahm conducted an inspection of the Zaidels' septic system, and the resulting inspection report found that the septic system did not meet code requirements. The parties disagree on the impetus for this first inspection (whether the Zaidels requested it because of Ms. Holton's offer or in response to a prior accepted offer), and the timing of the inspection (whether it was conducted before or after Ms. Holton presented her offer). The evidence on these two points conflicts:

• The inspection report completed by Mr. Filz and Mr. Zahm (the “Filz/Zahm Report,” Exhibit 3) was signed and dated March 18, 2013 by Mr. Filz (which is before the date of Ms. Holton's April 5 purchase offer), and signed and dated April 11, 2013 by Mr. Zahm (after Ms. Holton's purchase offer). See CM–ECF, Doc. No. 32 at 30.

• Mr. Filz testified that he was contacted by someone—he assumed it was Mandee Zaidel—to conduct a septic system inspection on the Property, and that he went to the Property on or before March 18, 2013 to inspect the septic tank. He testified that he retained Mr. Zahm to conduct the soil reading portion of the inspection. Mr. Filz completed questions 2 through 8 on the report, and later Mr. Zahm completed questions 1 and 9. Mr. Filz stated that it was Mr. Zahm who made the ultimate determination of whether the Zaidels' septic system passed the inspection, because the results of soil readings determine whether a septic system meets code requirements.

• Mandee Zaidel testified that she contacted Jeffrey Zahm to inspect the septic system only after Ms. Holton presented her offer to purchase. (Recall that Ms. Holton's offer was dated April 5, 2013.) Mrs. Zaidel disputed the accuracy of the March 18 date next to Mr. Filz's signature on Exhibit 3.

• The weather was bad when Jeffrey Zahm came to the Zaidels' property to conduct his inspection, and Mrs. Zaidel asked him why he would conduct the test on an icy, rainy day.

• Mr. Zahm informed Mrs. Zaidel while he was on the Property that the septic system did not pass the inspection. Mrs. Zaidel stated that she received a copy of the Filz/Zahm Report in the mail about a week after Mr. Zahm was on the Property. The Zaidels provided a copy of the report to their realtor Ms. Owens, who in turn provided it to Ms. Willems. Ms. Willems shared it with her client Ms. Holton.

• Ms. Holton testified that she knew the Zaidels' septic system had failed a septic inspection prior to making an offer on the house, and that she first saw the Filz/Zahm Report during her first tour of the Property.

• Nicole Willems, realtor for Ms. Holton, testified that neither she nor Ms. Holton had received any septic inspection reports prior to Ms. Holton making her offer, but later Ms. Willems testified that she had received the Filz/Zahm Report prior to Ms. Holton's April 5, 2013 offer.

• Mrs. Zaidel testified she put all of the documentation she had about the Property out on the counter during real estate showings, including the failed septic system report. She also testified that her family never experienced any problem with the septic system.

Considering the various witness recollections, the court finds Mr. Filz's testimony about the timing of his portion of the septic system inspection to be the most credible, and finds no reason to doubt the accuracy of the dates on the Filz/Zahm Report.

C. Events After the Failed Inspection

The next set of facts concern events after the failed inspection. Mandee Zaidel told her husband that the septic system did not pass the testing. Before the Zaidels received a written copy of the Filz/Zahm Report, Casey Zaidel called the Oconto County Zoning Office. He spoke to Assistant Zoning Administrator Kevin Brehmer about the failed inspection. Mr. Zaidel wanted to know why Mr. Zahm would perform the test on such a wet day. During this call, most likely on April 15, 2013, Mr. Brehmer told Mr. Zaidel that the septic system must be replaced, although he said the need for replacement did not have to hold up the pending sale. Replacement could take place within the year, according to Mr. Brehmer. Mr. Zaidel relayed this information to his wife. Neither Mr. Brehmer nor Mr. Zaidel testified to discussing a possible second inspection.

The Zaidels' former neighbor, Julie Johnson, testified that Casey Zaidel told her at...